China’s Cryptocurrency Represents An Entirely Different Worldview
For all the promise of decentralization, China’s central bank is close to launching its own cryptocurrency which will upend the decentralized and pseudonymous ethos upon which Bitcoin was first launched.
The shakes are always the worst part of the day, if he could somehow get over the shakes, maybe the rest of the day would be bearable. In the searing summer heat of Hillsboro, Ohio, John Langley, a third-generation dirt farmer wants nothing more than a swig of an ice cold beer or an ale, a stout or a cider to quench his parched lips.
But unfortunately for Langley, the year is 1929 and the town which became synonymous as the epicenter of Prohibition (the banning of alcoholic beverages) for the latter part of the 19th century, took to it once again with fervor in the first half of the 20th century.
Which means that Langley will have to find some other way to cope with the shakes.
For a nation built on alcohol (America once ran on booze before it ran on Dunkin), where men had a beer with breakfast, lunch, and dinner, the withdrawal symptoms from Prohibition were real.
And in the oppressive summer heat of Hillsboro, where the humidity made one’s shirt stay plastered to one’s back and it felt like wearing a coat of sweat in 100-degree heat, a coat which one could not take off, Langley dreamed of nothing more than a bit of beer, or perhaps a touch of ale, to help take the edge off.
Which is precisely what Langley proceeded to do.
In the backroom of a grocery store in downtown Hillsboro, Langley and a throng of men milling around, constantly on the lookout for law enforcement officers as scrambled to buy bootleg beer, made in the rural counties surrounding Hillsboro and furtively sneaked into the city in the cover of night.
As Langley and so many other men received their overpriced alcohol, they each brought their bottles up to their parched lips, letting out satisfied sighs, before the man selling them the alcohol chased them away, saying that they’d draw unnecessary attention by drinking there.
To be sure, the ale was not as crisp tasting as Langley had before Prohibition and it didn’t quite have the same finish, but alcohol was alcohol right, did it matter where it was made?
Currency is Currency Right?
Which is why when the People’s Bank of China (PBoC) recently announced that it was “close” to issuing its own cryptocurrency, the response in both the financial and cryptocurrency circles was circumspect at best.
To be sure, for the uninitiated, cryptocurrency is cryptocurrency after all isn’t it?
Why the segregation over the government and non-government issued cryptocurrency?
The technology may be similar, but who issues the cryptocurrency has a huge impact on how it works and the ramifications for its use.
Over a weekend in mid-August, at an event organized by China Finance 40 Forum and held in the city of Yichun, Heilongjiang, the PBoC’s deputy director of payments announced that the central bank had been working intensively since last year to develop systems for its own cryptocurrency, which was now “close to being out,” without going into any details or committing to any timelines.
But Mu repeated that the PBoC intended for its cryptocurrency only to replace M0 — cash in circulation, as opposed to M2, which would generate credit and impact monetary policy — in other words, those physical Chinese yuan notes and coins eventually be replaced by their digital brethren.
The benefits of digital currency use in China are obvious. Yuan notes are regularly used to pay bribes to officials of all ranks and are one of the world’s most counterfeited currencies. Physical notes and coinage are expensive to produce and cumbersome to process.
And with so much of China’s population already using digital payment systems such as AliPay and WeChat Pay, it was only a matter of time before the PBoC threw its hat into the ring with its own version.
Pressure perhaps from Facebook’s Libra cryptocurrency may also have led to the announcement. Although Facebook is officially banned in China, many Chinese maintain Facebook accounts using sophisticated VPNs to vault China’s formidable censorship firewall and the PBoC has said that Facebook’s Libra must be put under central bank oversight to prevent potential foreign exchange risks and protect the authority of monetary policy — and though this is not specifically mentioned — prevent capital flight, something which is rampant in China.
That capital controls were at the top of Beijing’s mind was made obvious at the China Finance 40 Forum, where Tianqi Sun, an official from China’s State Administration of Foreign Exchange said,
“Libra must be seen as a foreign currency and be put under China’s framework of forex management.”
Since protests first began in Hong Kong, many Chinese who had thought that the territory was a safe haven for their money, close to China, but not so close, have been provided a reason to reconsider where they stash their cash.
Among those who have stashed away cash in Hong Kong in the form of property and other assets, many are now starting to contend with the prospect of moving those funds further afield, lest Beijing become more belligerent towards the autonomous financial center and one of those conduits for offshoring assets includes Bitcoin and other cryptocurrencies.
Same But Different
But not all cryptocurrencies are built equal.
Unlike the grassroots-led decentralized blockchain-based Bitcoin and its imitators, the PBoC’s cryptocurrency will confer on Beijing even more absolute power and control over its financial system.
Based on patents registered by the PBoC, consumers and businesses would download a mobile wallet and swap their physical yuan for the PBoC’s cryptocurrency, which they can then use to make and receive payments.
Importantly, this allows the PBoC to track every instance when money changes hands.
For the pragmatic Chinese, it means no more fudging taxes and no more “under the table” persuasive powers on government administrators and for those working in the public service who have long padded their incomes surreptitiously, an end to the gravy train.
Earlier this month, in a statement listing its work plan for the second half of this year, the PBoC said that it would “expedite the research of China’s digital legal tender” and monitor the trends of virtual currency both at home and abroad.
Most Chinese will no doubt appreciate that while they may love the convenience of WeChat Pay and AliPay, there are more than a few transactions which they would prefer to keep “off the books” — and given that the PBoC’s cryptocurrency forms the basis of the mother of all books in the form of an immutable (undeniable) ledger — the PBoC’s push into cryptocurrencies may indirectly fuel more Chinese to push harder into the more anonymous world of cryptocurrencies such as Bitcoin.
To quote the American writer Mark Twain,
“Nothing so needs reforming as other people’s habits. Fanatics will never learn that, though it be written in letters of gold across the sky.”
“It is the prohibition that makes anything precious.”
Just as Prohibition fostered a generation of entrepreneurs quenching America’s thirst for alcohol through a black market for liquor, decades of communism and restrictions have fostered Chinese entrepreneurship that created an underground market economy long before Deng Xiaoping instituted the first market reforms to the Chinese economy.
China did not mint entrepreneurs overnight, they had been there waiting in the wings for generations and when Beijing recognized that it needed to institute reforms to bring China into the 21st century, these entrepreneurs quickly rose up to fill in the gaps that were needed.
Similarly, although China has banned Bitcoin and cryptocurrency trading, almost all of the top cryptocurrency exchanges such as Binance are run and owned by Chinese citizens. Chinese continue to be the world’s most significant miners of Bitcoin and other cryptocurrencies and continue to be responsible for the bulk of over-the-counter trade in Bitcoin and other cryptocurrencies.
Which is why the PBoC’s proposed cryptocurrency will not likely catch the most enterprising Chinese napping.
The Chinese know themselves best and no doubt there will be leagues of enterprising Chinese who will immediately recognize the dangers of using a government-issued cryptocurrency that is immediately traceable.
Which ironically may lead many Chinese citizens to an even greater push underground to cryptocurrencies, in particular, privacy-focused cryptocurrencies such as Bitcoin, Monero and Cardano.
To be sure, there are plenty of wealthy Chinese who have been using Bitcoin as a form of capital flight since the early 2010s, but things really only got into full swing by 2012, when news had spread of the ability of Bitcoin to cross borders and elude capital controls virtually undetected.
For the longest time, yuan notes and the physical currency was one such way to circumvent capital controls through one of China’s many porous border crossings.
Now that Beijing seems set to cure capital flight using physical cash through the issuance of its own cryptocurrency, Chinese will, just as Americans did during Prohibition, find a way.
With Facebook’s announcement of Libra, governments, regulators and central banks around the world have had to expedite their review of cryptocurrency regulation and central banks such as the PBoC have also had to accelerate their plans to issue their own cryptocurrencies.
Governments now have to contend with the possibility that non-government issued currencies could dramatically disrupt finance and payments.
By announcing its intent to launch its own cryptocurrency, the PBoC is merely ensuring that non-government issued cryptocurrencies do not supersede government control — whether that strategy will work or not remains very much to be seen.